Frequently Asked Questions about MSAs

Prepared by Ross Schriftman, RHU, LUTCF

Note: This is a general discussion of MSA strategies and is not intended as legal or tax advice. Please consult your tax advisor and/or your legal advisor for specific questions on how this program would affect your firm.

Wouldn't employees who are sick end up with more out of pocket with the MSA?
In most cases, the sick employee would be in a better position especially if they are paying a significant share of the group health insurance premiums. Besides the lower premiums, the MSA account would pay "first dollar" benefits. Traditional health insurance plans have deductibles. Managed care plans have co-payments. They each represent out of pocket expenses to the employee BEFORE the insurance company pays any benefits. With an MSA, the employee would have to use all of his or her MSA funds before having out of pocket expenses. In a sense, the combination of the MSA plan and the high deductible policy creates a corridor of out of pocket expenses.

What happens if someone has a lot of medical expenses early in the first plan year?
Again, besides the premium savings that can be used to pay the out of pocket expenses, the funding of the MSA can be made early in the plan year. The other solution is that the expenses could be spread out over the year. Many people who have no insurance make arrangements with providers to pay a bill on an installment basis. It is important to note that even though the exposure for a family may be a couple thousand dollars, this is significantly offset by thousands of dollars in premium savings throughout the year.

If the employer puts the money in the MSA account for the employer, don't they lose control of the funds?
This is correct. The employer's contribution to the MSA is an employee benefit expense. The money is now the employee's to use as they see fit. However, consider that the high premiums paid to an insurance company or HMO is also not recoverable to the business that pays premiums. The insurance company does not set up an account in the firm's name to reimburse the firm if claims experience is good as is done with a self-funded plan. In addition, under Pennsylvania law commercial insurance carriers must also pay the Commonwealth a 2% premium tax, which is charged as a pass through in premiums to the business. The bottom line is that premiums paid to an insurance company are gone forever to the firm.

Aren't there a lot of administrative requirements of this kind of plan?
Since the MSA account is the employee's, there is NO administrative responsibility by the employer for the account. This is opposite of a flexible benefit plan. If the employer is contributing to the MSA, the only additional administrative requirement would be to cut the check to the MSA in addition to cutting the check to the insurance company for the premiums.

Can our premiums go up in the future?
Just as traditional insurance and managed care plans, premiums are expected to rise in the future. However, with premiums starting at 30% to 50% less and with the smaller expenses being paid outside of the insurance plan, premiums may rise more slowly with an MSA. Remember that claims processing is usually a fixed cost based on volume and not the size of a claim. Insurance companies providing MSAs may experience less claims volume resulting in administrative savings that could be passed on to policyholders.

Aren't the employees restricted to use their MSA accounts for only covered expenses against their deductibles?
NO! The MSA account can be utilized to pay for eligible expenses as determined by Federal law. This may include a wide range of medical necessary expenses that an insurance plan does not cover including dental, chiropractic services, orthodontics, home modification, transportation to a doctor's office, nursing services and even "qualified" long term care insurance premiums. The benefit of the MSA account for the employee is that they can use the funds to meet their specific needs.

Aren't the accounts "tied up" if the employee needs money for other than eligible expenses?
NO! The funds are available for an employee to withdraw even for none eligible expenses. However, if the employee is not disabled or not of Medicare eligible age, the withdrawal would be taxed and a 15% penalty on the amount withdrawn would apply. *

Won't the employees have a very low rate of return on the MSA account?
MSA accounts are generally placed in money market accounts that currently earn 3.5% to 4.5%. It is important to have the funds in conservative, very liquid accounts especially until the amounts build up. This way, if there are unexpected large expenses, the funds will be there. However, Mutual Fund investing may be available as well. Of Course, there are investment risks to consider. However, funds will grow on a tax deferred basis and if the funds are used for eligible expenses the result is tax-free withdrawals. *

Why aren't more firms currently offering this plan?
When Congress passed the Health Insurance Portability and Accountability Act of 1996, there were certain restrictions placed on the program. They included a limit to the number of plans that could be offered and a sunset of the program. (The sunset has been extended to the year 2002 and does not affect persons participating before the end of the period). Also, plans can only be offered to self-employed persons and firms with 50 or fewer employees. Few insurance companies decided to invest time, money and marketing efforts in such a temporary prospect. Additional restrictions such as the lack of matching of the funds between employer and employee, limits on the contribution amounts and the lack of first dollar preventive services have made it more difficult for some individuals and firms to move forward.

What are the future prospects for MSAs?
Despite the restrictions established by Congress, interest in MSAs as an alternative has been growing. As many states add regulations over the managed care industry and as the Federal government is poised to pass sweeping new regulations, employers are being faced with a number of dilemmas. They include rising premiums resulting from both new regulations and higher usage of benefits as well as some dissatisfaction from workers concerning the choice of benefits and options. MSAs keep the employer provided health coverage, but add flexibility, premium savings and employee choices over health care.

Legislation in Congress to expand MSAs could see action this year. The expansion includes lowering the minimum deductible to $1,000 for an individual and $2,000 for a family, allowing the MSA annual contribution to be equal to 100% of the deductible, the ability for both employers and workers to contribute and first dollar insurance benefits for preventive services. In addition, the program would become permanent and all employers would be able to establish plans, not just small firms.

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